Impact on the United States of Closure of the Strait of Hormuz

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Impact on the United States of Closure of the Strait of Hormuz

  1. 1. UNCLASSIFIED Economic Effects of a Major SLOC Closure The transportation component of global economic system relies on two things: 1)commerce traveling through certain sea lines of communication (SLOCs); and 2) key ports suchas Singapore, Rotterdam, and Los Angeles/Long Beach, where this commerce is collected anddistributed. Together, these SLOCs and ports present opportunities for state and non-state actorswho seek to disrupt the global system. The U.S. and its partners’ have a vested interest inresponding to any such disruption of the system in a manner that restores confidence and the flowof commerce as quickly as possible. However, the response must be careful to avoidexacerbating an already unstable situation. In the past when the flow of commerce was disrupted,the global system has shown an ability to adapt by rerouting commerce, energy and resources.Typically this has happened faster than nations can respond politically or militarily. While thesystem does manage to continue to function, for political reasons, the U.S. and its partners areexpected to take action to restore the status quo.Global Commerce In today’s globalised world it is estimated that 90 percent of global trade is carried bysea.1 These goods are carried by the world’s trading fleet which consists of over 50,000 ships ofapproximately 690 million gross tons (GT) of displacement.2 The massive size of this fleetoffsets transport costs. For instance, the cost to a U.S. consumer at the gas pump of transportingcrude oil from the Middle East is less than one U.S. cent per liter.3Sea Lines of Communication The arteries of commerce that theses vessels transit daily are known as sea lines ofcommunications (SLOCs). These SLOCs narrow in a few areas producing tightly organizedchokepoints that are vulnerable to disruption by either an attack from the surrounding land or ablockage in the water. The fact that most of these chokepoints are located in political hotspotsadds to their vulnerability. As western nations’ dependence on foreign sources of energy has UNCLASSIFIED
  2. 2. UNCLASSIFIEDgrown in the past several, some of these chokepoints have taken on a strategic importance. Themajor chokepoints that today’s system depends on are: the Strait of Hormuz, the Strait ofMalacca, Bab el-Mandeb, the Suez Canal, the Bosporus, and the Panama Canal. Together thesesix chokepoints handle 35 million barrels (Mb/d) of crude per day. The Straits of Hormuz and theStrait of Malacca alone account for 60 percent of global oil transit.4 With the exception of the Strait of Hormuz, which will be addressed separately, evidencehas shown that an interruption in any of the strategic chokepoints mentioned will have a minimaleconomic impact on the global system. The support for this assertion comes from recent eventsinvolving piracy in the Gulf of Aden. Bab el-Mandeb, which connects the Gulf of Aden to theRed Sea, handles 3.3 million barrels of oil per day.5 In 2005 ships transiting the Gulf of Adenbegan to be attacked by groups of individuals on speed boats armed with small arms and RPGs.By 2008 pirate attacks had become a daily occurrence and captured ships were being ransomedfor millions of dollars. In October of that year the piracy in the Gulf of Aden had become such aproblem that some shipping employers and unions, among other nations, had agreed to declare ita warlike operation area. This doubled the pay of seafarers.6 Another consequence of the regional piracy was a rerouting of vessels. Some bulkshipping companies instructed their masters to keep away from the Suez Canal and sail aroundthe Cape of Good Hope. Using this alternate route can create a substantial increase in distance,up to 6,000 miles depending on the destination, at a cost of $5,000-$6,000 per day.7 To determine the economic impact of this detour crude oil prices provide an appropriatebarometer. Despite the fact that shippers were choosing to make a 6,000 mile detour, crude oilprices plummeted even though the piracy problem did not abate. From a high in July 2008 of$147 per barrel, oil was being traded in the mid $30 range on February 17, 2009.8 This is a 77percent drop in price in arguably the most serious global interruption to the flow of oil since thePersian Gulf War in 1991. It is clear from this example that there are far more powerful marketforces controlling the price of oil than the effect of interruptions to the supply chain. A reduction UNCLASSIFIED
  3. 3. UNCLASSIFIEDin global demand for crude caused by the global financial crisis has undone a 10 year climb in oilprices in slightly more than six months.9 Of the six chokepoints mentioned, only the Strait of Hormuz and the Bosporus do nothave alternate sea routes comparable to the Gulf of Aden; making a closure of any of themmerely an economic inconvenience. The Strait of Malacca, which is vital to China, has at leastthree alternate routes through the islands of Oceania that are marginally longer, and a fourthoption of going around the Australian continent. Additionally evidenced by the Gulf of Adensituation, the shipping industry will adapt faster than nations will in resolving the problem. Thenavies of the world will, without question, be called upon to restore the status quo, but with anysituation of such an international character, an organized multilateral response will requireextensive political cooperation. The U.S. Navy with its international organizational experience isuniquely equipped to handle this sort of effort. Its role will be critical as it has been incoordinating the effort to stop piracy in the Gulf of Aden.The Strait of Hormuz The Strait of Hormuz is altogether exceptional. Approximately 88 percent of thepetroleum exported from the Persian Gulf nation’s transits through the Strait of Hormuz - 5.3million barrels per day.10 The Strait itself is 180 kilometers long and at its narrowest point is 45kilometers wide. The two shipping lanes are 3.2 kilometers wide with a separation zone of 3.2kilometers.11 The most often mentioned scenario for the closing of this strait is mining by Iran. Froma tactical perspective Iran has the capability to rapidly mine the strait and cut off shipping for atime period as long as three to four months depending on how events unfold. Some experts, suchas Anthony Cordesman of the Center for Strategic and International Studies, maintain that Irancould only close the strait from a few days to two weeks. This, however, seems implausiblegiven the fact that most of the U.S. Navy’s mine countermeasure assets can only operate in apermissible environment.12 Iranian offensive coastal assets capable of attacking these vessels UNCLASSIFIED
  4. 4. UNCLASSIFIEDwould have to be eliminated before any operation could commence. Considering that the Iranianswould be prepared for the inevitable military response ahead of time, and the ruggedness of theterrain north of the Strait, which could be used to conceal Iranian installations, this mission couldtake months. With the strait closed few other alternatives remain. The Saudi pipeline for Persian Gulfoil to the Port of Yanbu on the Red Sea is the next best option. Its maximum capacity is 4.8Mb/d. Two other pipelines exist that link northern Iraq to Syria and Turkey, their combinedmaximum capacity is approximately 3 Mb/d.13 In total, the alternate pipelines can accommodateapproximately 50 percent of the capacity of the Strait of Hormuz. Therefore, a worst casescenario would be a reduction of at least half the oil currently flowing from the Persian Gulfbeing cut off for a minimum of three months. The economic effects of a closure of the Strait of Hormuz by Iranian mining would besevere. However, this effect must be put into context. Ultimately, Iran would pay the highest tollfor such an action. The effect of a U.S. led response would be catastrophic to the Iranianeconomy. During the Tanker Wars of the late 1980s, the U.S. responded to Iranian mining withstrikes on Iranian oil infrastructure and military targets. U.S. retaliation to renewed aggressionwould be similar if not more severe; the impact on the Iranian economy would be felt for years tocome. Additionally, recent Iranian attempts to frame itself as a regional hegemonic power wouldbe erased as a chorus of regional and international condemnation of its actions arose. In economic terms, the rise in oil prices over the last several years peaking at nearly $150per barrel had little effect on consumer demand for oil. With current oil prices trading in the $30-$40 range, a doubling in price would put prices back to slightly less than half of their recenthighs. It is doubtful that this would have a drastic impact. The most likely circumstance for Iranian action to block the Strait of Hormuz would be inthe context of a wider conflict. If a situation were to occur where a broad war in the region tookplace, it is possible that the Iranians may mine the strait in an effort to inflict damage to its UNCLASSIFIED
  5. 5. UNCLASSIFIEDopposition. However, if such a conflict were to occur global oil prices would already be elevateddue to the conflict itself. Therefore, while the Iranian threat represents a severe vulnerability ofthe world’s oil infrastructure, it is unlikely to occur. Non-state actors may also wish to conduct operations in the Strait of Hormuz that wouldaffect international shipping. However, due to the size and unique oceanographic characteristicsof this strait, it seems unlikely that even a well equipped non-state actor would have theresources, knowledge, and operational capability to conduct such an extensive operation. A non-state actor attack would likely resemble the piracy in the Gulf of Aden; high profile, butinsufficient to totally shut down the area.Weapons of Mass Destruction While the full economic effects of a Weapon of Mass Destruction (WMD) attack areextensive and beyond the scope of this paper a short evaluation is possible. Basically, it woulddepend on the nature of the attack. A suicide attack by an actor either in an independent vessel ona SLOC or detonating in the vicinity of a port facility would be severe in the vicinity of theattack. However, other than a tightening of security by nations around the world, the globaleffects would be minimal. This is a matter of individual port security. On the other hand, a WMD detonation that originated from a device in a container orplanted in ship would be very different. The perpetrators would have had to circumventestablished security measures that are supposed to control how goods are packaged and shipped.This would be catastrophic for the world economy. For example, if a container ship originatingin Indonesia was to be the carrier of a nuclear device that detonated in the port of Long Beach, allconfidence in security measures taken at the port of origin would be lost. Nations would takeextreme precautions to ensure that vessels entering their ports were safe. The effects of thiswould extend well beyond the blast radius. What would be the length of time and the cost ofnations implementing their own 100 percent screening measures at safe distance from their ports? UNCLASSIFIED
  6. 6. UNCLASSIFIEDMost of the world’s good and resources come from third world nations that do not have thatmoney to spend.The U.S. Navy’s Political vs. Economic Utility This paper has asserted that the global system is able to adapt and maintain a near statusquo to most interruptions. Therefore, what is the U.S. Navy’s role in these scenarios? Given thatmarket forces and individual companies will adapt to an interruption faster than a militaryresponse, the U.S. Navy’s role will be predominantly a political coordination after an interruptionhas occurred. It also fills what would otherwise be a power vacuum in various areas of the world.One example of this is the role the U.S. Navy has played in the Persian Gulf for the last halfcentury. Its presence in the gulf has stopped any one nation from destabilizing the region despitethe fact that many of the Gulf nations have massive oil wealth but disproportionate ability todefend themselves. When Saddam Hussein attempted to highjack the oil wealth of Kuwait in1990, the U.S. mobilized a global coalition to free Kuwait. Upon the war’s conclusion, the U.S.Navy prevented Saddam from again threatening its neighbors by enforcing the no fly zones.Conclusion The world’s sea lines of communication are the lifeblood of a world wide system that hasreached an unprecedented level of interdependence. The Achilles heel of these is a vulnerabilityto attack at a few strategic chokepoints. However, if one these chokepoints were attacked, all buttwo, the Bosporus and the Strait of Hormuz, would be able to respond with little to no impact onthe system. The effect of closing the Bosporus would be predominantly local. The effect ofclosing the Strait of Hormuz would severely interrupt the global flow of oil. However, in the caseof the Strait of Hormuz one must consider the likelihood of a complete shut down by a capableentity. This is not high, as it would damage all parties, most of all the initiator. Therefore, if the global system of seaborne commerce is not particularly vulnerable tointerruption, what then is the justification for a large naval presence in many parts of the globe?The U.S. Navy is today patrolling the waters of the Gulf of Aden with a global coalition that it is UNCLASSIFIED
  7. 7. UNCLASSIFIEDresponsible for coordinating. This is an action that demonstrates the diplomatic skill andprofessionalism that U.S. Navy embodies. Combined Task Force 51 has had a long history ofincorporating dozens of different navies into a common goal. Even at times including nationsthat are not part of the task force, as is currently that case with the Chinese piracy task force. In a globalized environment, the U.S. Navy is an arbiter, a coordinator, and a positivepolitical representative to the many nations that it interacts with on a daily basis. It hasrelationships with nations in all parts of the world helping them to patrol their own waters, whichkeeps the global maritime environment accessible to all. The U.S. Navy does not ensure globaleconomic security on the high seas; it ensures that the political relationships exist so that whenglobal security is threatened, an effective multinational force stands ready to restore it.1 IMO Factsheet,72 Ibid.,83 Ibid,94 Straights, Passages and Chokepoints, 365.5 Ibid, 366.6 “Gulf of Aden declared a warlike operation area”7 “ Operators opt for Cape of Good Hope rather than Suez.”8 “Oil slips as demand for crude wanes.”9 http://www.wtrg.com/prices.htm10 Straights, Passages and Chokepoints, 36711 Closing Time, 86.12 Ibid, 84.13 Straights, Passages and Chokepoints, 367. UNCLASSIFIED

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